Innovation Lessons from the Troublesome Start of AIRBNB

by Gijs van Wulfen

What began as a simple idea to earn some extra income and help out travelers from out-of-town eventually took off globally. AirBnB started in 2007 and is valued now at over $ 25 billion. There are at least 3 important lessons learned from its troublesome start. Here’s their story.

Two years after graduating from the Rhode Island School of Design in 2005, Brian Chesky and Joe Gebbia moved to San Francisco where they shared a three-bedroom apartment. When a major design conference came to town in 2007, they saw an opportunity to earn some extra cash by renting out their spare floor space. In no time they had put together a website advertising lodging for overnight guests. Later on, Chesky and Gebbia approached Joe’s former roommate, Nathan Blecharczyk, about handling the technical side of the “Airbed and Breakfast” website, as something of a side gig. As they explain, their concept had quite a casual character from the start, “We were offering full bed and breakfast service, but we didn’t have any beds, so we called it Airbed and breakfast.”

They realized there was an unmet demand for no-frills lodging at a stranger’s home.

The idea to turn this service into a real business came to them when they realized there was an unmet demand for no-frills lodging at a stranger’s home for one or two nights. Originally, Chesky and Gebbia were simply offering basic accommodation and expected that the concept would only appeal to recent graduates like themselves with little money to spend on hotels. However, as Gebbia recalls, “We had a 38-year old female who worked at Razorfish. And then we had an industrial designer from Salt Lake City who was even older. They slept on air mattresses on our kitchen floor. They broke every assumption we ever made about who would stay on an airbed at a stranger’s house.”

The AirBnB founders’ next step was to seek out an event as a pilot for their new business venture. They chose the South by Southwest (SXSW) music and film festival in Austin, Texas which hosts over 150,000 visitors. The event organizers, however, were not enthusiastic about the “Airbed and Breakfast” concept and rejected a partnership. This did not deter the three entrepreneurs and they responded by launching the second version of the Airbed and Breakfast website two weeks prior to the festival. They used local blogs and social media to advertise their lodging services. They had lodging addresses to accommodate up to 80 guests. By way of an informal market test, Brian Chesky rented one of the apartments listed on their own website. As it happened though, he carelessly forgot to pay his hosts in cash for two days straight and this oversight quickly cooled the hosts’ warm hospitality. It also inspired Chesky to modify their services. Their company prioritized the development of a payment in advance booking system. The benefits were two-fold. Guests were now able to pre-pay for their stay with a credit card and hosts could avoid the hassle of late payments. Service was further improved by introducing two other features: an online booking system similar to the one used for hotel reservations enabling users to book space in someone’s home online and a “Reviews” box where guests could post their comments about the accommodation, host(s) and overall experience as a reference for other guests.

In August 2008 an improved Airbed and Breakfast website was introduced and was marketed towards business travelers as a more affordable alternative to hotels. Airbed and Breakfast got a lot of media coverage and even caught the attention of The Wall Street Journal. In their business model they charged the guest a service fee of 6 to 12 percent for a reservation, and the host a 3 percent commission fee. The next trial run took place in Denver during the week of the Democratic National Convention. Convention delegates had access to 900 lodging options via the Airbed and Breakfast website. The start-up site ultimately booked 50 accepted reservations during the convention. Without any additional special events, Airbed and Breakfast’s weekly revenue amounted to roughly $200 in the fourth quarter of 2008. Discouraged, the founders questioned whether it was time to just throw in the towel. However, it was anticipated that the upcoming presidential inauguration would draw millions of visitors to the Washington D.C. area. This was the next real opportunity for Airbed and Breakfast. They were able to generate free publicity on the site and successfully generated 150 bookings. Nevertheless, once the event ended, the company’s prospects remained bleak. As the number of bookings staggered, the Airbed and Breakfast website was on the brink of being shut down. Instead, the pivotal decision was made in 2009 to join Y-Combinator, a start-up incubator program located in Mountain View, California.

Being part of an incubator were the most important three months in AirBnB’s history.

The Y-Combinator incubator provided much needed seed funding, access to investors, and mentoring. Its motto “Make something people want” sums up the spirit of the program and is printed on the T-shirts handed out to all the participants on their first day. The impact of this program was immense according to Chesky, “They were the most important three months in the company’s history.” During the 12-week program, Blecharczyk, Chesky and Gebbia changed the name of their site to AirBnB and shifted to expand beyond event accommodations. They focused on New York as a popular tourist destination and had meetings with their New York-based users, both hosts and guests. These interactions were very important, as Gebbia said, “We’d go to the city, talk to people who had listings, take professional pictures of their space. And in many cases write their listings for them. After making several trips, we had a really solid offering of good-looking spaces in New York City. It got us critical mass; we were able to set a lot of community standards, and we used the listing base we built in those weeks as a base off which to grow.” The $20,000 of funding from angel investor and co-founder of Y-Combinator, Paul Graham, led to an additional $600,000 from venture capitalists on Demo Day at the end of the program.

The AirBnB concept has proven to be hugely successful. Primarily, AirBnB provides a digital tool that connects people in need of an affordable place to stay with people who can supply affordable lodging. Secondly, there is the appeal of the AirBnB concept. Guests can live like a local and connect with hosts, form friendships and partake in local experiences they wouldn’t have found otherwise.

Over time, the initial concept and experience for both the guests and the hosts has had to evolve to maintain successful. Some major modifications introduced by AirBnB include a 24/7 customer support service as well as providing $1 million insurance for the host. Most recently, AirBnB launched a new product called instabook. With the click of a button you can make your reservations just like you do for a hotel. Commenting on the potential of instabook, Chesky says, “One thing that we’re doing is trying to shift every host to mobile. We’ll eventually get to a place where every booking is instabook.”

Demonstrating a very visible emphasis on community and connectedness, as part of AirBnB’s company strategy in 2014, its new brand logo, the Bélo, was introduced and dubbed the universal symbol of belonging. In November 2014, the AirBnB Open, a host convention, was organized to inspire hosts as well as teach them practical tips when they rent out their homes and rooms to travelers. About 1,500 hosts from 40 countries came to the Fort Mason Center in San Francisco for the weekend event. In addition, AirBnB facilitates host groups for knowledge sharing, integrated into a host application that also embeds hospitality standards and guidelines, as well as standalone meet-ups for hosts to exchange information. As it expands, AirBnB continues to invest significantly in creating a global community and sense of partnership.

From 2009 onwards, AirBnB’s financial conquest of the world has really taken off. In November 2010, AirBnB was able to raise an additional $7.2 million from a venture capitalist. Following this, the company received a further $112 million in venture funding in July 2011 and was reportedly valued behind the scenes at $1.3 billion.

Five years after the start, AirBnB was valued a $2.5 billion company.

Five years after the start, AirBnB was valued a $2.5 billion company with revenues of $250 million, with a presence in over 34,000 cities around the globe.

While AirBnB is still financing its expansion and burning cash with a forecasted operating loss of about $150 million in 2015, The Wall Street Journal reports that AirBnB’s value is currently estimated around $25.5 billion.

The company continues to grow quickly with 25 million guests bookings via AirBnB in 2014. In 2015, it’s expected that AirBnB will generate more than $900 million in revenue, half of which is generated in Europe.

As of 2015, the website has around 1.4 million listings which include modest apartments, exotic beach homes and quirky properties. Paris, the French capital, is now AirBnB’s largest market, with 40,000 listings. More than 517,000 people stayed in Paris in summer 2014, which is a 20-fold increase compared with 2011.

As AirBnB grows in these markets, it also encounters new challenges especially concerning local city regulations and tax laws. In some countries, legislation is being reviewed to check the legality of AirBnB-type rentals.

There are many lessons learned from the troublesome start of AirBnB. I like to emphasise the following three:

Get connected to real customers in a very early phase of your start-up and experiment.

Pivot your new concept, when it doesn’t perform according to your standards.

Persist, persist and persist.

I wish you lots of success on your innovation journeys.

Did you like this AirBnB case? It’s part of Gijs van Wulfen’s new innovation book. Check out the introduction offer at: Amazon UK or Amazon US.

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Gijs van Wulfen helps organizations to structure the chaotic start of innovation as author, speaker and facilitator. He is the founder of the FORTH innovation method and author of the innovation bestseller The Innovation Expedition. He was chosen by LinkedIn as one of their first 150 Influencers. Are you looking for an inspiring innovation speaker? Check out the movies and great reviews at gijsvanwulfen.com. Follow Gijs @gijsvanwulfen